Until the last days of June, when the second quarter ended, Israel's publicly traded companies were in a frenzy. They were lining up to borrow money from investors, usually through bonds linked to the consumer price index. The Tel Aviv Stock Exchange says that during the first eight months of 2007, companies raised a stunning NIS 80 billion through corporate bonds.

But as the third quarter comes to an end, we find that money isn't free. And sometimes its cost is heavy indeed.

Inflation lifted its head during the third quarter. Consumer prices shot up by 2.5 percent and more than 100 of the companies listed on the TASE found their profits diving, or disappearing, because of their heavy outlay on CPI-linked bonds.

Eight companies have already released profit warnings for the third quarter, which means they expect their earnings to fall significantly short of initial expectations. They are Africa Israel, IDB, Gaon Holdings, Strauss Group, BGI, Housing & Construction, Scope Networks and Isralom.

Strauss issued its warning on Monday, saying that its financing costs had risen by a cool NIS 20 million against the parallel quarter of 2006.

But the number of companies that were hurt and will ultimately publish profit warnings because of the high CPI is far greater.

The Prisma investment firm found that the high CPI figures during the third quarter should theoretically increase the financing costs of the Tel Aviv-listed companies by a collective NIS 12 billion. That is an almost unimaginable sum, caused by the fact that the companies had raised almost unimaginable amounts of money, from you and you and you, mostly. From the public, via institutional investors.

The worst hit are the companies that borrowed the most. The Israel Electric Corporation owes NIS 28 billion to bondholders and the indexes hurt it to the tune of NIS 700 million.

IDB's damage is NIS 560 million and the two big banks, Hapoalim and Leumi, find their financing bills growing by NIS 450 million and NIS 420 million respectively.

Naturally the worst-hit sector is real estate. Its companies have been tapping the market like woodpeckers. More than half the companies stung by the CPIs belong to the real estate sector, though other casualties belong to the energy sector (Paz Oil and Oil Refineries, to name two); the banks (we already mentioned Hapoalim and Leumi), the marketing chains (Super-Sol) and the investment firms (IBI, Clal Finance).

Meron Katsap, research (micro) manager at Prisma, explains that the many offerings the companies held increased their leverage, resulting in heavy financing costs for the quarter. But he reminds us that it's all on paper, not actual outlay. So he's hopeful that low CPI figures in the months to come will ease the pain.

Katsap also finds comfort in factors that could counter the financing costs. One is that the companies haven't actually used most of the money they raised. Much of the money isn't linked to the CPI, but to the dollar. Also, many of the companies hedge their exposure, Katsap says.

These are reasons why some firms won't have to issue earnings warnings after all, he concludes, even though at first glance the damage might seem to be substantial. For instance, take the Bezeq phone company, which the CPI cost NIS 80 million in extra costs - but Bezeq habitually hedges itself heavily.

Katsap also thinks that some companies will be warning investors even when they don't strictly have to, for the sake of good order.

But ignore these warnings at your peril, he says. Investors in Tel Aviv don't let things like this just slide by. On the day it issued its warning Africa Israel saw its stock tumble 3.5 percent, and that's a lot for a large-cap company. The fashion chain Castro sank 2.8 percent on the day of its warning.

Katsap still argues that the effect is still mainly psychological, and won't really affect the companies' financial statements. But at least one major analyst doesn't agree: "Now the market is learning that loans have to be returned, and that companies that live off margins, like real estate firms, can't just shrug things off as a figment of accounting."

The Fishman companies. Tshuva's Delek empire. All the companies on the Real Estate-15 index have published or will be publishing warnings. And don't think the plague will skip over the small-caps such as Pangaea and Financial Levers.

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